Assurant 2012 Annual Report Download - page 44

ASSURANT, INC.2012 Form10-K36
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
•the extent of data segmentation—data should be homogeneous yet
credible enough for loss development methods to apply; and
• the past variability of loss estimates—the loss estimates on some
product lines will vary from actual loss experience more than others.
Most of our credit property and credit unemployment insurance
business is either reinsured or written on a retrospective commission
basis. Business written on a retrospective commission basis permits
management to adjust commissions based on claims experience.
 us, any adjustment to prior years’ incurred claims is partially o set
by a change in commission expense, which is included in the selling
underwriting and general expenses line in our consolidated statements
of operations.
While management has used its best judgment in establishing its estimate
of required reserves, di erent assumptions and variables could lead to
signi cantly di erent reserve estimates. Two key measures of loss activity
are loss frequency, which is a measure of the number of claims per unit
of insured exposure, and loss severity, which is a measure of the average
size of claims. Factors a ecting loss frequency include the e ectiveness
of loss controls and safety programs and changes in economic activity
or weather patterns. Factors a ecting loss severity include changes in
policy limits, retentions, rate of in ation and judicial interpretations.
If the actual level of loss frequency and severity are higher or lower than expected, the ultimate reserves required will be di erent than management’s
estimate.  e e ect of higher and lower levels of loss frequency and severity levels on our ultimate costs for claims occurring in 2012 would be
as follows:
Change in both loss frequency and severity for all Property and Warranty Ultimate cost of claims occurring in 2012 Change in cost of claims occurring in 2012
3% higher $ 1,237,077 $ 71,013
2% higher $ 1,213,173 $ 47,109
1% higher $ 1,189,502 $ 23,438
Base scenario $ 1,166,064 $ 0
1% lower $ 1,142,626 $ (23,438)
2% lower $ 1,118,955 $ (47,109)
3% lower $ 1,095,051 $ (71,013)
Reserving for Asbestos and Other Claims
Our property and warranty line of business includes exposure to
asbestos, environmental and other general liability claims arising from
our participation in various reinsurance pools from 1971 through
1985.  is exposure arose from a contract that we discontinued
writing many years ago. We carry case reserves, as recommended by
the various pool managers, and IBNR reserves totaling $34,946 (before
reinsurance) and $27,790 (net of reinsurance) at December31, 2012.
We believe the balance of case and IBNR reserves for these liabilities
are adequate. However, any estimation of these liabilities is subject
to greater than normal variation and uncertainty due to the general
lack of su ciently detailed data, reporting delays and absence of a
generally accepted actuarial methodology for those exposures.  ere
are signi cant unresolved industry legal issues, including such items as
whether coverage exists and what constitutes a claim. In addition, the
determination of ultimate damages and the  nal allocation of losses to
 nancially responsible parties are highly uncertain. However, based on
information currently available, and after consideration of the reserves
re ected in the consolidated  nancial statements, we do not believe that
changes in reserve estimates for these claims are likely to be material.
DAC
Information in this report for the years ended December31, 2011, 2010,
2009, and 2008 has been revised, as applicable, for the retrospective
application of the Company’s adoption of the amendments to existing
guidance on accounting for costs associated with acquiring or renewing
insurance contracts. See Note2 to the Consolidated Financial Statements
for more information.
Only direct incremental costs associated with the successful acquisition
of new or renewal insurance contracts are deferred to the extent that
such costs are deemed recoverable from future premiums or gross
pro ts. Acquisition costs primarily consist of commissions and premium
taxes. Certain direct response advertising expenses are deferred when
the primary purpose of the advertising is to elicit sales to customers
who can be shown to have speci cally responded to the advertising
and the direct response advertising results in probable future bene ts.
 e deferred acquisition costs (“DAC”) asset is tested annually to
ensure that future premiums or gross pro ts are su cient to support the
amortization of the asset. Such testing involves the use of best estimate
assumptions to determine if anticipated future policy premiums and
investment income are adequate to cover all DAC and related claims,
bene ts and expenses. To the extent a de ciency exists, it is recognized
immediately by a charge to the consolidated statements of operations
and a corresponding reduction in the DAC asset. If the de ciency
is greater than unamortized DAC, a liability will be accrued for the
excess de ciency.
Long Duration Contracts
Acquisition costs for preneed life insurance policies issued prior to
January1, 2009 and certain discontinued life insurance policies have
been deferred and amortized in proportion to anticipated premiums over
the premium-paying period.  ese acquisition costs consist primarily
of  rst year commissions paid to agents.
For preneed investment-type annuities, preneed life insurance policies
with discretionary death bene t growth issued after January1, 2009,
universal life insurance policies and investment-type annuity contracts
that are no longer o ered, DAC is amortized in proportion to the present